How enterprise risk management practices impact the Standard & Poor’s rating process.
Terry Pratt is director at the Standard & Poor’s Public Utilities, Power & Project Finance Ratings division.
About a year ago, Standard & Poor’s expanded the methodology used to review and assess the enterprise risk management practices of U.S. energy firms with trading desks. The methodology, known as the PIM framework, focuses on the three aspects of policies, infrastructure, and methodology, and produces a comprehensive evaluation of a firm’s risk management. The importance of each of these aspects in a company’s risk culture, and our opinion of its risk management quality, will depend on that company’s size, complexity, and range of risk.
Strong enterprise risk management is vital to the financial health and creditworthiness of energy companies with trading desks. Energy traders take complex risks every day, so energy companies have to be able to identify risks correctly and have the right tools to measure those risks. If risk-management practices are inadequate or are poorly integrated, the rating can suffer.
Incorporating PIM into the rating process enables rating companies to understand a company’s management better. Analysts now think not just about current risks and control processes, but also about potential and emerging risks, and how those fit into the risk assessment framework.